JULY 10, 2015

By George Abraham, CA

THE new standard rate of service tax, 14% up from 12.36% came into effect on 1-6-2015. A time has come to have close look at the legal provisions relating to determination of the applicable rate of service tax.

The Finance Act, 2012 inserted a new section 67A in Chapter V of the Finance Act, 1994. It reads:

'67A. The rate of service tax, value of taxable service and rate of exchange, if any shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided.

Explanation. - For the purposes of this section, "rate of exchange" means the rate of exchange referred to in the Explanation to section 14 of the Customs Act, 1962 (52 of 1962).'

With the above section coming into force on 28-05-2012 the rate of service tax is the rate in force or applicable at the time of provision of service. What a person liable to service tax is required to do is to determine the time when the service is provided or agreed to be provided, ascertain the rate of tax applicable at that point of time and then compute and pay the tax.

A year before the above section was brought in the Central Government had notified Point of Taxation Rules, 2011 w.e.f. 1-4-2011. These rules were made in exercise of the powers conferred under clause (a) and clause (hhh) of sub-section 2 of Section 94 of the Finance Act, 1994 and were for the purpose of collection of service tax and determination of rate of service tax. Section 94 contains powers of the Central Government to make rules. Sub-section 2 lists certain specific matters in respect of which rules may be made and these include in sub-clause (a) collection and recovery of service tax under sections 66 and 68 and in sub-clause (hhh) the date for determination of rate of service tax and the place of provision of taxable service.

Thus there was already a set of rules to decide the rate of tax. Then what was the need for the new section? There is even a perception that it is contradictory to the rules and with the recent revision in the rate of tax, disputes may arise regarding the rate applicable.

Let us see what the Point of Taxation Rules, 2011 postulate. The rules from 3 to 8A envisage different situations and deal with determination of the point of taxation in each case. It is rule 4 that is relevant when there is a change in the effective rate of tax.

Rule 4 (w.e.f. 1-4-2011) reads:

'4. Notwithstanding anything contained in rule 3, the point of taxation in cases where there is a change in effective rate of tax in respect of a service, shall be determined in the following manner, namely:-

(a) in case a taxable service has been provided before the change in effective rate of tax,-

(i) where the invoice for the same has been issued and the payment received after the change in effective rate of tax, the point of taxation shall be date of payment or issuing of invoice, whichever is earlier; or

(ii) where the invoice has also been issued prior to change in effective rate of tax but the payment is received after the change in effective rate of tax, the point of taxation shall be the date of issuing of invoice; or

(iii) where the payment is also received before the change in effective rate of tax, but the invoice for the same has been issued after the change in effective rate of tax, the point of taxation shall be the date of payment;

(b) in case a taxable service has been provided after the change in effective rate of tax,-

(i) where the payment for the invoice is also made after the change in effective rate of tax, but the invoice has been issued prior to the change in effective rate of tax, the point of taxation shall be the date of payment; or

(ii) where the invoice has been issued and the payment for the invoice received before the change in effective rate of tax, the point of taxation shall be the date of receipt of payment or date of issuance of invoice, whichever is earlier; or

(iii) where the invoice has also been issued after the change in effective rate of tax but the payment has been received before the change in effective rate of tax, the point of taxation shall be the date of issuing of invoice.

Clause (e) of rule 2 defines 'point of taxation' as the point in time when a service shall be deemed to have been provided. A harmonious reading of Section 67A with the point of taxation rules implies that the point of taxation is the time when the taxable service has been provided or agreed to be provided and the rate of service tax shall be the rate in force or as applicable at the point of taxation. However it is strange that one has to first determine the time when a taxable service has been provided, whether before the change in effective rate of tax or after the change in effective rate of tax, to decide when the service is deemed to have been provided.

There is a view that in respect of assessees covered by the third proviso to rule 6 of the Service Tax Rules, 1994 (individuals and partnership firms with aggregate value of taxable services not more than rupees fifty lakhs in the previous financial year and opting to pay tax on receipt basis up to rupees fifty lakhs in the current year) the point of taxation is the date on which the payment is received. This would mean that where services were provided and invoice was issued before 01-06-2015 but payment is received after that date, tax is payable at the rate of 14%. Support for this interpretation is sought from circular no. 158/9/2012-ST dated 8-5-2012. However, erstwhile rule 7 which provided that point of taxation would be the date on which payment was received has been substituted w.e.f. 1-4-2012 and now there is no such provision in the rules.